Tax overhaul won't be easy sell for Minn. governor

Tuesday

Jan 22, 2013 at 10:00 AM

Dayton's aim is two-fold: He's trying to address a $1.1 billion projected deficit, while bringing what he sees as equity and stability to the tax system that generates nearly $18 billion per year (and growing).

Brian Bakst, Associated Press

Milky Way candy bars are taxed in Minnesota, but Twix bars — because of their flour content — are not. An Elvis album bought from a record store is automatically taxed, but one downloaded from the Internet isn't. Shoppers pay tax on presidential biographies and tap-dance shoes, but not history class textbooks or wing-tips.

Such contradictions are rife throughout the state's tax system, which governor after governor has said is ripe for a remake. Democratic Gov. Mark Dayton is expected on Tuesday to become the latest seek a top-to-bottom overhaul. If the past is any guide, he will find a political minefield awaits him.

After all, the bigger the plan, the harder the sell.

"Eventually you get to that critical mass where more people don't like what you're doing than actually want it," said Tom Hanson, who was finance chief under former Republican Gov. Tim Pawlenty. "The whole system is designed to prevent something than to pass something."

Dayton's aim is two-fold: He's trying to address a $1.1 billion projected deficit, while bringing what he sees as equity and stability to the tax system that generates nearly $18 billion per year (and growing).

The governor has made no secret of his plans to seek a new income tax tier affecting the richest 2 percent of Minnesotans. But administration officials also have been carefully studying ways to reshape the state's sales, corporate, property and tobacco taxes, with an eye toward boosting rates on some and cutting them on others.

The tax code is "out of balance," Revenue Commissioner Myron Frans said last week. "We're not getting the right revenue from the right sources."

Frans and his team have held 162 public meetings in 50 cities as they've assembled the administration's tax plan. In each, Frans has worked to convey the shortcomings and complexities of the current system.

He notes the amount of tax breaks isn't very far off from the amount collected. In 2010, the state would have pulled in $27 billion from all of its tax sources if not for credits, exemptions and other breaks that totaled $11 billion. In the income tax alone, there are 50 potential subtractions, up from nine in 1987.

Frans also contends the tax code hasn't kept up with the times. When Minnesota enacted its sales tax in the 1960s, people spent more of their income on goods than services. Today, two-thirds goes to services. Legal fees, haircuts and car repairs are among those still untaxed. Minnesota has the highest sales tax in the region, but one of the smallest bases.

The coming debate is likely to be familiar. In 2001, Independence Party Gov. Jesse Ventura pressed to dramatically reduce property taxes while imposing sales taxes on services. He would have cut the overall sales tax rate in the process.

Ventura urged lawmakers to stick with the whole package, saying it was "like a fine woolen sweater, that if you pull out a thread or two the sweater will fall apart."

But in the end, the Legislature slashed property taxes and left the sales tax alone. Before long, the property tax relief eroded.

What Dayton has going for him is a Legislature controlled by fellow Democrats.

What he lacks is an economy strong enough to make up some of the losses. Capitol veterans say major tax changes are easier to pull off in times of surplus because excess money can be used to soften any sudden effects.

House Tax Committee Chairwoman Ann Lenczewski, DFL-Bloomington, thinks it could be hard to make a sales tax expansion palatable without a reduced rate.

"With the deficit, the first dollar you raise, you have to apply to the deficit. So you can't turn around and lower the rate at the same moment," she said.

Republicans are on guard. Sen. Julianne Ortman, of Chanhassen, the leading Senate Republican on tax issues, said she's willing to revamp the tax code but not just to give the state more to spend.

"Tax reform is not the same thing as raising taxes," she said. "Otherwise it looks like a wolf in sheep's clothing to me."

With Democrats in charge, there's broad agreement that tax increases will be part of a final budget deal. Whether Dayton will get the bigger shake-up he's after is unclear.

Peter Hutchinson, who was budget chief to the last Democratic governor, said the outcome probably hinges in what Dayton does to build public pressure. Hutchinson recalled how his former boss, Gov. Rudy Perpich, would pop into coffee shops and drive to far-flung towns to sell his agenda to a weary public. Dayton got his start in politics under Perpich and holds him up as a political hero.

"If the governor wants any of this to happen, he has to leave St. Paul," Hutchinson said. "People in Minnesota know the tax system isn't fair. They want fixes."

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